Valley Ntl Q2 2026 Earnings Call Transcript

Valley Ntl (NASDAQ:VLY) held its second-quarter earnings conference call on Thursday. Below is the complete transcript from the call.

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The full earnings call is available at https://edge.media-server.com/mmc/p/gny2asas

Summary

Valley National Bancorp reported strong financial results for Q2 2026 with net income of $171 million, or $0.29 per diluted share, and adjusted net income of $173 million, or $0.30 per diluted share.

The company saw significant growth in customer deposits, particularly non-interest-bearing deposits, and a diversified increase in loans, especially in C&I and owner-occupied commercial real estate.

Valley National is focusing on expanding fee income, with notable growth in capital markets and tax credit advisory services, and expects fee income growth to reach the higher end of their projected 2026 range.

Strategic initiatives include leveraging technology and AI to improve efficiency and productivity, with an anticipated structural shift in efficiency ratios over time.

The company maintained a positive outlook for 2026, expecting continued earnings growth, and plans to balance organic growth with capital returns, including buybacks and dividends.

Full Transcript

OPERATOR

Good day, and thank you for standing by. Welcome to Q2 2026 Valley Ntl Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded.

I would now like to turn the call over to Andrew Giannetti. Please go ahead.

Andrew Giannetti, Investor Relations

Good morning, and welcome to Valley Ntl's second quarter 2026 earnings conference call. I am joined today by CEO Ira Robbins and CFO Travis Lan. Our quarterly earnings release and supporting documents are available at valley.com. Reconciliations of any non-GAAP measures mentioned on the call can be found in today's earnings release and presentation. Please also note slide 2 of our earnings presentation, and remember that comments made today may include forward-looking statements about Valley Ntl and the banking industry, and actual results may differ from those statements.

For more information on these forward-looking statements and associated risk factors, please refer to our SEC filings, including Forms 8-K, 10-Q, and 10-K. With that, I'll turn the call over to Ira Robbins.

Ira Robbins, CEO

Thank you, Andrew. Our second quarter results illustrate continued progress against our strategic growth priorities. We delivered strong customer deposit growth, including meaningful growth in non-interest-bearing balances. We generated diverse loan growth concentrated in C&I and owner-occupied commercial real estate, and we continue to expand fee income in both absolute dollars and as a percentage of revenue. We remain focused on strengthening our value proposition by scaling our relationship-oriented, commercially focused model across our markets and business lines.

While the quarter's growth was encouraging, our focus remains on the quality, durability, and strategic value of the relationships that we attract. We believe continued execution against these priorities will support stronger returns over time. This execution translated into strong financial performance for the quarter. Net income was approximately $171 million, or $0.29 per diluted share. Excluding certain non-core items, adjusted net income was approximately $173 million, or $0.30 per diluted share.

Adjusted pre-provision net revenue increased 6% from the prior quarter, and at 1.64% of average assets reached its highest level since the fourth quarter of 2022. Deposit growth remains central to our strategy. We believe that our diversified commercial and consumer funding channels are increasingly critical as deposit competition intensifies across the industry. By expanding our commercial banking talent and driving greater adoption of our treasury platform, we expect to continue to win relationships based on service, capability, and value—not simply based on rates.

These efforts directly contributed to nearly $300 million of non-interest-bearing deposit growth during the quarter. On the asset side, our focus in C&I and owner-occupied commercial real estate continues to drive strong loan growth and greater portfolio diversification. C&I growth was broad based during the quarter with contributions from New York, Florida, Chicago, and our specialty healthcare and fund finance verticals. These efforts also support our non-interest-bearing deposit growth as we continue to target disciplined, well-funded commercial relationships that can contribute to our sustained profitability improvement.

Fee income was another area of strength. Sequential growth was driven by high-quality, sustainable businesses, including capital markets and tax credit advisory. Within capital markets, we continue to see a strong pipeline of value-led syndication opportunities, while swap activity has benefited from higher commercial real estate origination volumes. These fee-based capabilities are an important part of our commercial value proposition, and based on performance to date, we remain on track to achieve our 2026 growth objectives.

As we discussed a bit last quarter, technology and artificial intelligence are becoming increasingly important to our ability to further scale our franchise. From a macro perspective, we believe that banks that can effectively adopt AI have the potential to structurally shift their efficiency ratios lower by around 500 basis points. At Valley Ntl, we intend to be an industry leader, and we are excited about the progress that we have made to date.

As shown on slide 9 of the deck, we believe that Valley Ntl has several structural advantages that support our AI strategy, including Valley Ventures, our international and technology banking business, and our relationship with Bank Leumi in Israel. Valley Ventures gives us direct exposure to the startup ecosystem and access to emerging talent and technologies. Our international and technology banking team provides deep relationships with venture capital funds and early-stage technology companies, including businesses expanding from Israel into the United States.

Additionally, our relationship with Bank Leumi gives us additional visibility into leading practices in cyber-fraud and risk management. We have a robust team of AI practitioners focused on sourcing use cases and aligning solutions from these relationships that I just mentioned. Importantly, our AI strategy is embedded in our broader operating model and is intended to support productivity, risk management, client experience, and scalable growth. As we look ahead, our priorities remain consistent and clear: continue to grow core deposits, deepen commercial relationships, generate more diversified loan and fee income growth, and improve operating efficiency to translate our progress into stronger returns. We expect our continued commitment to these areas to drive further shareholder value over time. With that overview, I will now turn the call over to Travis to walk through the financial results and our outlook in more detail.

Travis Lan, CFO

Thank you, Ira. Based on our first half results and the continued momentum that we are seeing, we are maintaining our strong outlook for 2026. We now expect gross loan growth at or somewhat above the high end of our range and believe that fee income will also migrate towards the high end of our expected range. Our outlook for deposit growth and net interest income is unchanged from the upwards revision announced on last quarter's call. We expect continued earnings growth and profitability improvement throughout the remainder of the year and into 2027.

Turning to capital deployment, we continue to balance organic growth, capital returns and balance sheet flexibility. During the quarter we returned approximately $81 million to shareholders in the form of common dividends and the repurchase of 1.5 million shares. The quarter's reduced buyback activity was the product of our exceptional loan growth and we will continue to toggle our buyback appetite in the context of near term loan growth expectations.

We remain very comfortable with our regulatory capital ratios. Our ability to support substantial loan growth, repurchase shares, and reduce our regulatory CRE as a percentage of risk-based capital by another 12 percentage points during the quarter demonstrates our flexibility and the value of our accelerating organic capital generation. Slide 14 illustrates the quarter's strong deposit growth. Direct customer deposits increased $1.1 billion during the quarter including nearly $300 million of non-interest deposit growth, $200 million of interest bearing non-maturity deposits, and $600 million of retail CDs.

While core deposit growth remained extremely strong during the quarter, we did utilize $200 million of incremental broker deposits to fund the temporary timing mismatch resulting from our high-quality loan growth. We also strategically rotated nearly $700 million of floating rate NOW balances to brokered CDs within our indirect deposit portfolio. Total deposit costs were effectively unchanged from the first quarter and remained meaningfully lower than 2.67% a year ago.

We remain focused on growing high-quality direct deposits and continuing to improve our funding profile over time. Slide 17 details the $1.6 billion increase in loans during the quarter, equating to around 13% on an annualized basis. Incremental growth continues to be focused in our C&I and owner-occupied CRE portfolios and, as Ira mentioned, we saw specific strength in the New York, Florida and Illinois markets and our healthcare vertical during the quarter.

Regulatory CRE, which excludes owner-occupied loans, grew less than $100 million during the quarter. As a result of our strong organic capital accretion and our successful subordinated debt issuance in May 2026, our CRE concentration ratio declined to approximately 317% at June 30 from 329% at March 31. In general, our loan portfolio continues to evolve in line with our strategic priorities as we replace low value transactional CRE with relationship-based C&I and owner-occupied CRE loans which are contributing deposits to the bank.

Net interest income on a tax equivalent basis increased to $488 million, up approximately $16 million from the first quarter and $55 million from the year-ago period. Net interest margin on a tax equivalent basis expanded 3 basis points linked quarter to 3.2% and was up 19 basis points from the second quarter of 2025. The linked quarter increase in net interest income reflected higher average loan balances and higher yields on new loan originations and investment securities.

These benefits were mitigated somewhat by the cost of carrying excess subordinated debt between our issuance of $500 million in May and the redemption of our $300 million callable notes in June. We estimate that this dynamic weighed on net interest income by around $2 million during the quarter. Noninterest income increased $4.9 million to $73.7 million and contributed over 13% of our total revenue during the quarter. The linked quarter increase was driven primarily by a $2.6 million increase in capital markets revenue and a $1.6 million increase in wealth management and trust fees.

The fee growth reflected higher transaction volumes within loan participations and syndications and tax credit advisory services. We continue to view fee income as an important part of our business model evolution. Our enhanced treasury management platform, capital markets capabilities, tax credit advisory activity and broader commercial product set are giving us more ways to deepen relationships and generate additional high-quality and sustainable noninterest income.

As mentioned earlier, we now expect 2026 fee income growth to be towards the higher end of our previously announced 6% to 9% range. Reported noninterest expense was $311 million, up approximately $1 million from the first quarter. Adjusted noninterest expense increased by $5 million as lower compensation costs were offset by higher FDIC expenses, third-party spend associated with our operational transformation efforts and incremental costs related to the quarter's strong growth and fee income results.

Our efficiency ratio improved to 52.1% from 53.1% in the first quarter and 55.2% a year ago and expenses as a percent of average assets remains well below peer levels. As Ira mentioned, we remain focused on driving positive operating leverage including through the continued use of technology and AI tools to support productivity, improve process consistency and reallocate capacity towards higher value activities. We expect our efficiency ratio will continue to improve as we drive additional revenue growth and control operating expenses in the remainder of 2026 and beyond.

Despite a modest uptick in nonaccrual and past due loans during the quarter, we saw a significant reduction in criticized and classified assets on both a sequential quarter and year-over-year basis. As detailed on slide 25, criticized and classified assets now stand at 7.3% of total loans versus 8.1% a quarter ago and 9% last year. The continued improvement reflects improving underlying trends within our CRE portfolio, which has led to upgrades out of special mention and substandard classifications, in addition to traditional payoff activity.

Net charge-offs totaled $22 million or 17 basis points of average loans compared with $18 million or 14 basis points last quarter. The provision for credit losses for loans was $29 million compared to $21 million in the first quarter. The higher provision was due in part to the strong loan growth, particularly within the C&I category. Our allowance for credit losses for loans declined to 1.16% of total loans from 1.18% at March 31. This modest allowance coverage reduction is reflective of the criticized and classified asset reduction I just mentioned.

For the remainder of 2026, we continue to expect charge-offs and provisions in line with our prior guidance. Tangible book value increased nearly 8% on an annualized basis. Our CET1 ratio of 10.7% remains within our previously stated target range and our successful issuance of new subordinated notes, net of redemptions, bolstered total risk-based capital during the quarter. Our current capital levels provide appropriate flexibility to support our growth and capital return aspirations going forward.

In summary, the second quarter demonstrated continued progress against the strategic priorities we have outlined. Stronger core deposits, more diversified relationship-based loan growth, improving net interest income and margin, sustainable fee income growth, expense discipline and balanced capital deployment. We are pleased with the momentum in the business and remain focused on delivering continued profitability improvement through the remainder of the year.

With that, I will turn the call back to the operator to begin Q&A. Thank you.

OPERATOR

Thank you. As a reminder, if you would like to ask a question, please press star 11 on your telephone. You will hear the automated message advising when your hand is raised. We also ask that you please wait for your name and company to be announced before proceeding with your question. One moment while we compile the Q&A roster. Our first question today will be coming from the line of Phoebe Strickland of Havi Group. Please go ahead.

Fadi, Analyst

Hey, good morning. You know, just wanted to touch on fee income. Seems like a really strong quarter there and the guide seems pretty positive. If we continued at this level, it looked like you probably exceed the guide. Is the expectation some of the more volatile lines like capital markets likely step down from the high point in the second quarter?

Travis Lan, CFO

Yeah, Fadi, this is Travis. Now I think there's good consistency and continued growth opportunity. The one element that you kind of referenced within capital markets is our interest rate swap income which is heavily tied to commercial real estate originations. As you saw, the second quarter loan growth was extremely strong and included some pull forward from things that we may have expected to have closed in the third quarter. So I do think the swap income element was slightly elevated.

Maybe that equates to a million or $2 million in aggregate. But other than that, I mean, I think you still see continued growth in deposit service charges. Loan syndications were strong, tax credit advisory was strong as well and insurance picked up. So I think there are other elements, but I do think this interest rate swaps is the one that may have been slightly elevated during the quarter.

Fadi, Analyst

All right, great. Thank you. And if I could just switch gears to credit. Great to see the criticized and classifieds start to decline again. You mentioned some positive trends in CRE driving some of that. Can you provide any more detail on maybe what some of those trends are and really what you're seeing to drive some of these upgrades?

Mark Sager

Absolutely. Fadi, it's Mark Sager. So in general, right, the feel of our CRE clients is that the market continues to be robust in all asset classes for the most part, including office. We're starting to see positive progress in lease-up in office. Our portfolio upgrades and payoffs primarily associated with some assets that were in transition in lease-up and were downgraded. We had strong sponsor support. We had expected those properties to perform and lease-up.

And we are seeing that and that's attributing to our payoffs, our upgrades. And again we feel that there's room in portfolio to continue to see that positive trend in criticized.

Fadi, Analyst

Great. If I could squeeze in one more, credit. Can you just talk about the agentic AI for underwriting? Just curious if you have any example of kind of how that works and what parts of the process you see the most opportunity to speed up, maybe underwriting without compromising on the quality of the underwriting.

Mark Sager

Sure, absolutely. And to be clear for us, we're in exploration and examination phase. We don't have agentic in our core analysis right now, but traditional proven financial statement spreading, rent roll population within our core systems — those we are employing right now — but we're highly invested in examination to continue to expand those capabilities, although not employed.

Travis Lan, CFO

This is Travis. I would just add, Fadi, that I think like most AI use cases, the manual work can be automated but it doesn't change the oversight and approval and governance that's around those AI efforts. So, you know, elements to Mark's point have already been embedded but it's not like that's occurring in a vacuum with no human oversight. It's just shifting the roles and responsibilities somewhat.

Fadi, Analyst

Got it. Makes sense. Thanks, Travis and Mark. I'll sit back.

OPERATOR

Thank you. One moment for the next question. Our next question is coming from the line of Chris McGrady of KBW. Please go ahead.

Chris McGrady, Analyst

Oh great. Good morning, everybody. Travis, the focus a lot of the mid-caps this quarter in the regionals has just been the accelerating loan growth, but a little bit of funding pressures. Interested in how you're thinking about that dynamic, growth versus margin, as you go into the back half of next year. And then secondarily, do you have the spot price on the deposits? Thanks.

Travis Lan, CFO

Yeah, so I think that's fair. The expectation for rates has changed somewhat since we came into the year. We've talked about being effectively neutral to the front end of the curve. From a rate sensitivity perspective, I think we still see that playing out. So for us, I think we have some differentiated opportunities because we still have $5 billion of brokered deposits. Over the last 12 months we've generated about $4.5 billion of new core deposits.

That's $8 billion over the last eight quarters. So we're seeing the core deposit growth trend be consistent and expanding. In the remainder of this year we have $2 billion of brokered CDs coming off at a rate of 4.1% and $1.4 billion of fixed-rate loans at 4.7%. So you think about the repricing benefits of both of those items. It gives us good confidence in the margin outlook. I don't think there's any argument that deposit competition is heating up, but I do think that that's occurring more on the consumer side, and a lot of our focus has been on commercial deposit growth opportunities.

This quarter we originated, exclusive of CDs, $1.3 billion of new deposits at a blended rate of 1.66%. Last quarter, excluding CDs, that number would have been $800 million at 1.78%. So we had some CD promos out there that helped us generate volume, but exclusive of that we're actually seeing our ability to generate new deposits at lower rates. And I think all that's supportive of our margin guidance for sure through the rest of the year. From a spot deposit perspective, the rate was 2.29% as we exited June.

Part of that was elevated from March by two or three basis points because of the CD promos that we had out in the market.

Chris McGrady, Analyst

Okay, great color. Thanks. And Ira, I want to make sure I heard the AI discussion right. I think the comment was 500 basis points. I think that was either operating leverage or an efficiency comment. I guess I'm more interested in how the role of AI plus the role of capital, smarter regulation, is going to impact perhaps that mid-teens ROE that you've been talking about for some time.

Ira Robbins, CEO

Thanks. Yeah, thanks for the question. I think there's tremendous opportunity on both sides of the balance sheet when we think about the AI implications to it. When we think about how much or what the composition of that 500 basis points is going to be, in my mind it's more along the efficiency ratio, but it's really driven probably around 65% coming from expenses and around 35% coming from revenue. And as we think about resource deployment, whether it be capital or human, as to how we're thinking about extracting that actual benefit, that's probably where those allocations come from.

On the expense side, we think about gearing ratios and what the implications of those are going to be across frontline and support areas. We're already seeing the elimination of certain software across the organization, so reduction in specific expenses and just an improvement in efficiency. On the revenue side, we do believe that we're going to be able to get a larger share of wallet based on some of the enhancements we're doing with the data and the analytics and the ability to really, really provide some critical value-add information to our clients.

And we believe that's going to be differentiating for us and give us additional revenue opportunities as well. So we're definitely looking at deploying capital associated with it. I think for the year to date we've seen about $15 million, plus or minus. Travis, correct?

Travis Lan, CFO

Yeah, all in, we have $15 million of saves in the expense run rate against about $3 or $4 million of AI-associated expenses that are new, whether it's headcount or vendor spend.

Ira Robbins, CEO

So for us it's not just an exploratory phase. There's actually real ROI that's already coming from it, and we think that it's going to be enhanced and that will help us get to the 50% ROTC that we targeted. But I think as Travis has talked about before, there's not a reliance upon the ROTC on the AI to get to the 15% ROTC number.

Chris McGrady, Analyst

That's great color. Thank you.

OPERATOR

Thank you. One moment for the next question. Our next question will be coming from the line of David Smith of Truist Securities. Please go ahead.

David Smith, Analyst at Truist Securities

Hey, good morning. Could you talk a little bit more about your loan and deposit pipelines and how you're thinking about the timing and drivers of growth over the rest of the year? I guess the guidance implies deposits outgrowing loans by about $400 million for the full year. But through the first half, I think it's kind of the opposite. Loans have been about $400 million ahead of deposits. So I don't know if there's any seasonality or timing for either of those lines that we should be thinking about.

And then secondly, as core deposits catch up to loans, should we expect meaningful improvement in deposit costs as you're running brokered down?

Travis Lan, CFO

Yes. David, this is Travis. On the loan growth, we're running 9% on an annualized basis. But if you look back over the last 12 months, I think it's hit kind of exactly what we've said, which is around 10% growth in C&I and mid-single-digit aggregate loan growth. So I would expect the second half of the year looks more like what we've done over the last 12 months than what we did this quarter, which was exceptional. We've been talking for the last 12 to 15 months about hiring efforts on the commercial side.

Those efforts resulted in a growing pipeline. Coming into the second quarter, we saw very strong pull-through. So the pipeline's down about a billion dollars from March 31 to June 30, but remains a couple hundred million dollars ahead of where it was coming into the year. I think seasonally the third quarter is typically a little bit slower with summer vacations and things like that, and you see acceleration then in the fourth quarter and towards year-end.

So when we revised the loan growth guidance higher, we said to kind of at or somewhat above the high end of the 4% to 6% range. I think that's accurate. I also think that because of the timing expectation, it's probably not a material change relative to our average loan expectations for the year. On the deposit side, we continue to see, as I said earlier, very consistent growth. We've been growing about a billion dollars a quarter in core deposits.

One thing we've observed, obviously, is as we put on C&I loans, there is somewhat of a lag to achieve the deposit expectations that come with those loans. So we look back at, just as an example, loans we originated in January. As of March, they had generated about 10% of the deposits that they had expected. We looked again in June, that was up to 80%. So there's a three- to six-month lag in terms of getting all the deposit opportunity achieved. So that's why I think we highlighted something of a timing mismatch this quarter.

The loan growth was exceptional, the deposit growth was exceptional, but over the next two quarters I do expect that that gap will certainly close and we'll continue to see the brokered deposits come down. Again, we have for the remainder of the year about $2 billion of brokered CDs coming off at a rate of 4.1% on a blended basis. This quarter I kind of gave you what the new origination for deposits was, well below that, and I think that's part of what drives the structural tailwind that we have and that differentiates us from a lot of peers.

David Smith, Analyst at Truist Securities

Got it. Any change to your NIM outlook for the fourth quarter?

Travis Lan, CFO

No, we still think exiting low to mid-330s is what we've talked about. There's no change to that.

David Smith, Analyst at Truist Securities

Great. Thank you.

OPERATOR

One moment for the next question. And the next question will be coming from the line of Tamara Brasilia of UBS. Please go ahead.

Tamara Brasilia, Analyst at UBS

Hi, good morning. Going back to the expense conversation and some of the expected benefits from AI, any color you can provide on potential timeline there? I know that there's some potential learnings from LUMI as well. Maybe just talk us through the expense side of the equation, when we can actually start seeing some of those benefits minimizing some of the more recent expense growth.

Travis Lan, CFO

Morning. Yeah, this is Travis. I think again, as Ira mentioned, some of it's already in, and obviously we continue to execute opportunities there. I wouldn't let some of the expense items this quarter cloud that message. And when I say that, when you look at the expense growth this quarter, $5 million sequentially, a million of that is from higher FDIC expenses. We just talked about the amount of deposit growth that we've seen. We had exceptional growth this quarter in loans and fee income.

There are certain incentives that are associated with that that get tied into your expense number. And then we've used third parties to help us operationalize some of our transformation efforts, which in some cases includes AI, but not in all cases. I think that in the professional service line you'll see come down. There will be some follow-up transition, though, as we continue to optimize our onshore headcount. You'll see a transition where compensation costs should continue to come down or stabilize and you'll see some professional fees offsetting that.

Overall, that's a positive trade for our expenses and our efficiency ratio. But there's always a lot of moving pieces in every quarter. And I feel very good about the AI efficiencies that we're getting and that there's more to come, but I wouldn't take too much, again, from the sequential change in expenses. I kind of gave you some of those items that are very unrelated to the AI discussion that we're having.

Tamara Brasilia, Analyst at UBS

Okay, great. And then maybe looking at the loan growth this quarter, we saw multifamily get re-engaged. You called out some strong growth in the healthcare vertical for CRE. I'm just wondering about the mix of future loan growth, and maybe talk through some of the spread dynamics within the CRE bucket versus what you're putting on.

Travis Lan, CFO

Yeah, for sure. Within commercial real estate. Oh, sorry, you cut out there at the end. Maybe repeat whatever you said after asking about loan spreads.

Tamara Brasilia, Analyst at UBS

Yeah, just if that spread persists, that's going to have a meaningful change on loan yields going forward.

Travis Lan, CFO

Yep, gotcha. Thank you. Within commercial real estate, again, the majority of our growth is coming from the owner-occupied portfolio. You did call out multifamily was higher this quarter, but you'll see construction was down. So a good amount of that multifamily growth was construction loans that went into perm. So it's effectively neutral to your regulatory CRE ratio. From a spread perspective, obviously we're hearing a lot in the market about spread compression, and we see volatility on a monthly basis, but in general it's been fairly stable for us.

Part of this, to your point, is C&I loan originations have picked up and our spreads are hanging in better there than in CRE. And so that loan origination growth in C&I has offset some spread compression in CRE. So we were conservative coming into the year, assuming that spreads were tighter. Nothing that we've seen is, candidly, out of line with the expectations that we had. So we feel good about that. But yeah, it remains competitive out there, particularly in CRE.

Tamara Brasilia, Analyst at UBS

Great, thank you.

OPERATOR

Thank you. One moment for the next question, please. The next question is coming from the line of David Chiaveria of Jefferies, please go ahead.

Frank, Analyst

Hi everyone, this is Frank on for Dave on asset repricing. Loan yields came in, I believe, three basis points higher quarter over quarter, and you guys called out the new originations coming in at higher rates. Can you just provide any color about how much fixed asset repricing that we still have going into the second half of the year and maybe anything into 2027?

Travis Lan, CFO

Yep, for sure. So for the remainder of this year we have $1.4 billion of fixed-rate loans that are maturing at a rate of 4.67%. So that's, call it, 150 basis points lower than where new originations are. For the first half of next year, there should be an additional—just doing some quick math—an additional $1 billion at a rate of about 4.75% that matures. So I think that provides some of the tailwind that we're talking about on the loan side.

Frank, Analyst

Great, thank you. And just last one for me on capital. How are you guys prioritizing capital between, I guess, loan growth, buybacks, and potential CRE concentration bring-down from here? Thanks.

Ira Robbins, CEO

Yeah, I don't think there's been any change in the way we think about capital deployment. We continue to see our focus primarily is on well-funded, high-quality loan growth, and secondarily on the buyback. So this quarter, obviously, we had more significant loan growth and we toggled back on the buyback. But next quarter, should loan growth lighten up a little bit, then we'd be more active on the buyback. So I think we've been pretty consistent with how we approach that.

CET1 is right in the middle of our guidance range. There's no change to those expectations. And then I forget to ask the party question,

Frank, Analyst

The CRE concentration.

Ira Robbins, CEO

Oh, CRE concentration. Yeah, I mean that's—you know, you've seen it come down consistently. I mean this quarter I think is a very good example where it came down 12 percentage points, 9%. Nine of those 12% was because of the excess sub debt, but the remaining 3% was due to organic capital accretion. I mean we still grew regulatory CRE by $100 million and were able to drive that ratio lower by effectively 3% on an organic basis.

Frank, Analyst

Great, thank you,

OPERATOR

Thank you. One moment please for the next question. And that will be coming from Anthony Elian of JPMorgan. Please go ahead.

Mike, Analyst at JPMorgan

Good morning, this is Mike on for Tony. I'll start on credit quality. You guys saw some migration in and out of the 30 to 59 day bucket and nonaccruals—you attributed that to some CRE loans. Could you share a little bit more on that and sort of latest thoughts on how you're feeling about credit quality overall into the second half of the year?

Mark Sager

Absolutely. Mike, this is Mark Sager. Again, for the migration into nonaccrual, two of the three loans that moved into that category today are appraised extremely strongly; we're covered by value. A unique scenario—one office portfolio where we could not come to terms with a continuation and are looking to exit. So that's matured. We're continuing to receive payments on that and it's well collateralized. The other loan has been wavering between, you know, hovering at the 60-day bucket.

It did go beyond 90 days; we moved it into nonaccrual. They did make a payment and are running closer to 60 days on that one as well. Very well collateralized. We're not concerned about the value and do continue to expect to get payments on that. I'd point out, in our nonaccrual portfolio we continue to have approximately 50% of our nonaccruals continuing to pay interest. So we really look at the overall trends and the large reduction in credit criticized as more of an indication of where the portfolio is going, and we're seeing really solid trends there.

Mike, Analyst at JPMorgan

Awesome, thank you. And then on the ACL ratio, it fell a few basis points quarter over quarter, but you guys reiterated the provision expense outlook. Do you still think you'd be able to get back up to the 1.20% by the end of this year?

Travis Lan, CFO

I don't think we have a hard and fast target of 1.20%. I think it's well within a range that we're very comfortable with. If you look on a year-over-year basis, it's down 2 basis points—the allowance coverage—despite a 15 percentage point reduction in our criticized and classified. And so, as criticized and classified continues to come down, it would imply a lower ACL. It's then offset by the C&I loan growth that we're putting on, which is obviously carrying a higher allowance with it.

So I think everything's playing out kind of as we expect. You know, we say general stability each quarter, but we always note that it will move around a couple basis points just given the economic assumptions in the model and other things. But I think generally this has been pretty stable now for a long period of time.

Mike, Analyst at JPMorgan

Got it. Thanks, guys.

OPERATOR

Thank you. One moment for the next question. And the next question is coming from the line of Matthew Brese of Stephens. Please go ahead.

Matthew Brese, Analyst at Stephens

Hey, good morning, Travis. I wanted to go back to funding. Considering the competitive dynamics for deposits now, but kind of against the maturing brokered, what are your expectations for deposit cost increases from here? And then how much of the $5 billion in brokered do you think can, or do you want to, replace with core? I'm assuming there's some residual that's there on an ongoing basis. I'm curious what that number is.

Travis Lan, CFO

Yeah, on the deposit cost, I mean we continue to—I think the way, the easiest way to think about it is the level of competition has the potential impact of raising core deposit costs. However, we have the offset from the brokered, and we look at that in aggregate. I mean our model currently has, call it, four or five basis points of deposit cost expansion in the next two quarters, and I say that noting that in aggregate we think margin will be improving five to seven basis points for each of the next two quarters as well.

So you're getting enough offsets on the earning-asset side. Within brokered, I don't think it's ever going to get to zero. I mean brokered deposits serve a very important purpose from an interest rate risk management perspective. But as we've said, our goal is to get loans-to-non-brokered to 100%, and I think we can certainly do that. I mean there have been periods when you look back over the last eight or ten quarters where it's been very chunky in terms of the brokered reduction.

So again, the core deposit growth has been very consistent, I think something we're very proud of. I think our ability to grow core deposits without relying solely on rate has been differentiated, and we'll continue to make good progress there. But to your point, I don't think brokered goes to zero. I think there's a reasonable level where it's helping to support our interest rate risk management strategy and securities.

Matthew Brese, Analyst at Stephens

Yep, yep. Okay. And then you touched on it a little bit, but just thinking about the NIM longer term—obviously we're in this period now where there's a lot of kind of fixed asset repricing benefits. But if I look back to, like, 2023 when loan yields started to spike for the industry, assuming some of that rolls off in 2028, I'm just curious, you know, do you start to see from your model the NIM kind of level off as we exit '27 and into 2028 because of that?

I'm curious just kind of your longer-term thoughts, I guess.

Travis Lan, CFO

Yeah, I mean I'll get you through to the end of 2027, which is we expect continued expansion between now and the end of '27. It's not like it peters out at any point during the next year. And I would expect that there are continued tailwinds beyond 2027. I think the thing to keep in mind for us is, given our CRE concentration entering '23 and '24, we weren't originating a lot of fixed-rate CRE loans when rates were highest. And so for that reason we don't have kind of what I would call the repricing headwind of higher fixed-rate loans coming off.

The fixed-rate loans that we have coming off remain pretty low-yielding. And so I think (A) that gives us an opportunity and (B) helps us to—kind of like others may have seen more volatility in prepayment activity—we haven't really seen that because, again, we weren't putting on a lot of CRE loans when rates were highest.

Ira Robbins, CEO

Matt, I would just add to that. I think we've made a lot of structural changes across the organization since then, as well as you think about the investments that we've made within the treasury solution product that we have, the C&I teams that we brought in, the de-emphasis of some of the commercial real estate assets, which obviously have a lower relationship and compensating balance associated with it. So I think Travis speaks to sort of what the model lays out.

I think we've made a lot of progress as to how we think about what Valley Ntl is going to look like in '28 versus maybe what it looked like in '23. And the structural funding advantages we think will definitely have a lot of tailwind associated with it as well.

Matthew Brese, Analyst at Stephens

Got it. Okay, Ira, maybe while I got you, we talked about that mid-teens ROTC outlook. When do you think you can hit that based on what you know today?

Ira Robbins, CEO

I mean, I think we've given guidance towards beginning of '28, I think is sort of where we set some of this—ROTC to 15% was going to be. I still think we see a lot of tailwind in where the margin is going. I know we talked about the deposit pressure that we're seeing from an industry perspective, but we feel pretty confident about where that is, and a lot of positive operating leverage is going to come as we think about where the expenses are headed across the organization as well.

So I think the guidance that we've given, in my mind, really hasn't changed at this point.

Matthew Brese, Analyst at Stephens

I appreciate it. I'll leave it there. Thank you very much.

OPERATOR

Thank you. One moment for the next question. Next question will be coming from the line of Janet Lee of TD Cowen. Please go ahead.

Janet Lee, Analyst at TD Cowen

Good morning. On expenses, can we assume that the professional and legal fees are trending down in the second half of 2026 and through 2027? I believe this line item has been elevated because of the transformation efforts that have been ongoing for the past few years. And also, you're talking up a lot of AI benefits and the positive impact on efficiency ratio and positive operating leverage, plus your expectations on NIM expansion through 2027. How should we think about how that's impacting the efficiency ratio target?

You've talked about sub-50%-ish by the end of '26. How should we think about it beyond 2026, if you could comment on it?

Travis Lan, CFO

Yeah, maybe I'll start with the second one. There's no change to our expectation that the efficiency ratio should be, you know, 50% or lower as we exit 2026. And I think Ira made a comment that industry-wide AI, longer term, should give people, you know, potential opportunity to enhance their efficiency ratios by, call it, 500 basis points. And I don't think we feel any differently at Valley Ntl. So if you're going to exit '26, you know, at or below 50%, I think there's an additional opportunity to continue to drive it lower.

I mean, for us, a lot of the revenue tailwinds that we're benefiting from in '26 continue into '27, as we've talked about. So our expectation is our efficiency ratio continues to drive lower. I think there's a good opportunity to do that as we continue to drive net interest income and fee-income growth and keep expense growth much lower than the pace of revenues. So I think that plays out. From an expense perspective, you asked about the professional C line—I agree with your comment.

I think this will be close to the peak, or the peak, in professional fees as we kind of now begin to offboard some of the third parties that have been here to help us from a transformation perspective. So I agree with your comment.

Janet Lee, Analyst at TD Cowen

Okay, thanks for all the color. And sorry if I missed, but are the new deposits that are coming into the bank on the core side, including NIB, are they coming in around 2.5%, which is, I believe, what was quoted about a quarter or two ago, or maybe slightly higher than that? Or maybe you could give an updated number.

Travis Lan, CFO

Yeah, for sure. So I'm going to give a lot of numbers here, so I apologize, and hopefully it plays out right in the transcript. But in the first quarter in aggregate, we originated $1.4 billion of new core deposits at a rate of 2.55%. This quarter we originated $2.5 billion in aggregate at a rate of 2.71%. So to your point, it's slightly higher. However, this quarter's originations include about $600 million of retail CD promos at a rate of 4%. If you were to exclude CDs from both quarters, we originated in the first quarter $800 million at 1.78% and in the second quarter $1.3 billion at 1.66%.

So exclusive of CDs, we originated $500 million more of core deposits at a rate that was 12 basis points lower than the first quarter.

OPERATOR

Thank you. And we do have a follow-up question coming from the line of David Smith of Truist Securities. Please go ahead.

David Smith, Analyst at Truist Securities

Hi, thanks for letting me come back in. I just wanted to clarify, I don't know if you had mentioned the Fed interest rate assumptions for the NII guide. Could you confirm those please? And apologies if I just missed it.

Travis Lan, CFO

Yeah, no worries. At this point we have one hike assumed for 2026 and I think another half hike, as bizarre as that sounds, for 2027. We've talked about, David, being effectively neutral to the front end of the curve, and so that continues to be our balance sheet positioning. Effectively, our floating-rate loans, which is about 40% of our loan portfolio, balance the amount of deposits, when you adjust for beta, that would also float on the front end.

So whether there's two cuts or two hikes or no hikes or cuts, it doesn't materially change our NII outlook. We're more exposed to the belly of the curve, and we've seen some good expansion there since the beginning of the year.

David Smith, Analyst at Truist Securities

And remind us, is that on a constant-size balance sheet, or does that include, like, you know, a presumed slowdown in balance sheet growth if rates are a little bit higher?

Travis Lan, CFO

Well, as we have gotten—as we do more C&I, the amount of loans that float on the front end of the curve would increase. At the same time, that's effectively where our deposit growth is coming as well. So the statement is made with our balance sheet today, but given the growth that we're seeing, I think it would be consistent going forward. To the degree there would be any change in our sensitivities, we would be willing to use hedges to make sure that we're keeping our sensitivity within ranges that we're highly comfortable with.

David Smith, Analyst at Truist Securities

Oh no, I meant more along the lines that, like, higher rates can weigh on loan growth, for example.

Travis Lan, CFO

Oh, gotcha. No, I think we're far away from that. I mean, we've added a lot of talent. We're in the right markets; we're in the right specialty verticals to continue to grow. I don't think that we expected it would materially change our loan growth outlook with some reasonable expansion in longer-term rates.

David Smith, Analyst at Truist Securities

Got it. Thank you.

Travis Lan, CFO

Thank you.

OPERATOR

And that does conclude the Q&A session for today. I would like to go ahead and turn the call back over to Ira Robbins for closing remarks. The floor is yours.

Ira Robbins, CEO

Once again, thank everyone for taking the time to join us this quarter. Obviously, we're very excited about the results and what we're looking for for the rest of the year, and looking forward to talk to you again after the third. Thank you.

OPERATOR

This concludes today's program, and thank you for joining. You may now disconnect.

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